Today Spotify is reporting results for Q3 2018. The quarter was largely
in line with our expectations and our guidance range, except that
Operating Margin outperformed our forecast.

MONTHLY ACTIVE USERS

MAUs grew 28% Y/Y to 191 million at the end of Q3. Growth in our
emerging regions of Latin America and Rest of World continues to outpace
growth in our more established markets.

Ad-Supported MAUs totaled 109 million at the end of the quarter, up 20%
Y/Y. Earlier this year we began rolling out a new user interface for our
Ad-Supported tier of service, the first major revision since our mobile
product was introduced in 2014. We expect this new user interface to
drive improvements in engagement and retention.

We continue to work to identify and remove users that we consider to be
“fake” from our reported metrics. This includes, but is not limited to,
bots and other users who aim to manipulate stream counts for purposes of
royalty calculations. Such users are removed from our metrics in a
timely fashion once they are discovered. However, some such users may
remain in our reported metrics because of the limitations of our ability
to identify their accounts.

PREMIUM SUBSCRIBERS

Premium Subscribers totaled 87 million at the end of Q3, up 40% Y/Y.
Growth continues to be healthy across our Family and Student plans, and
the strong retention characteristics of this base continue to drive
churn lower. In Q3 average monthly churn declined 90 bps Y/Y, as it did
in Q2. This quarter we offered to verified Student subscribers in the US
our first ever multi-partner bundle consisting of Spotify, Hulu, and
Showtime for $4.99 per month. In addition, we expanded our 3-for-99¢
intro offer campaign for our Student plan globally during August and
September to line up with the back-to-school season.

We also announced several other notable partnerships during Q3:

FINANCIAL METRICS

Revenue

Total Q3 revenue was €1,352 million, up 31% Y/Y. Excluding the negative
impact from foreign exchange rates growth in revenue would have been 33%
Y/Y.

Premium revenue was €1,210 million in Q3, up 31% Y/Y. On an F/X neutral
basis, Premium revenue was up 34% Y/Y.

Average revenue per user (“ARPU”) was €4.73 in Q3. This represents a 6%
Y/Y decline, a significant improvement from the 12% Y/Y ARPU decline we
reported in Q2. Family and Student plan growth has caused a reduction in
ARPU. The marginal downward pressure on ARPU has moderated as the
installed base of Family and Student plan subscribers has grown.
However, subscriber growth in low ARPU regions like Latin America,
Southeast Asia, and other newly launched markets could add incremental
downward pressure on ARPU. Changes in foreign exchange rates also
contributed to the Y/Y decline in ARPU. Excluding the impact of changes
in foreign exchange rates ARPU would have declined 4% Y/Y.

Ad-Supported revenue of €142 million re-accelerated its Y/Y growth in Q3
by 10 bps to 30% as compared with Q2’s Y/Y growth. This was a result of
changes we made to our data policies in late Q2 to improve our ability
to measure performance and show advertising effectiveness. While we did
see changes in F/X rates in a number of markets, on a consolidated basis
there was no material variance in the F/X neutral growth rate of
Ad-Supported revenue.

Ad-Supported revenue growth was due primarily to Y/Y growth in our US
direct channel of 32% and global growth in our programmatic channel of
44%. Direct sold ad revenue accounted for 78% of total Q3 Ad-Supported
revenue. Demand in the US remains strong and is expected to outstrip our
available inventory in Q4.

Last quarter we said that we expected our Programmatic and self-serve
products to become a significant portion of our Ad-Supported revenue. If
we’re successful in achieving this shift in revenue mix, then we also
expect to achieve significant operating leverage in the ad sales
business, increasing our operating margins. Last quarter we reported on
our new automated self-serve platform, Ad Studio, which is live in the
US, UK, Canada, and Australia. Ad Studio revenues are still quite small,
but we’re seeing exponential growth, so expect to hear more about this
product in future quarterly updates.

Gross Margin

Gross Margin was 25.3% in Q3, up from 22.3% in Q3 2017, and slightly
lower than Q2. As we have previously discussed, Gross Margins are
seasonally lower in Q1 and Q3 resulting from the costs of the major
seasonal promotional campaigns we typically run in Q2 and Q4 each year.
A majority of the expense of these promotional subscribers is absorbed
following the quarter of intake onto the platform. As long as we
maintain this promotional campaign cycle we would expect this seasonal
pattern to continue.

Premium Gross Margin was 26.1% in Q3, down from 26.9% in Q2, but up from
22.9% in Q3 2017. Ad-Supported Gross Margin was 18.6% in Q3, up from
16.3% in Q2 and 17.0% in Q3 2017.

Ad-Supported Gross Margins are relatively strong in our top five markets
and relatively weak in our 60 other markets, including newly launched
markets. As these markets grow, we believe margins should too. Our
Ad-Supported Gross Margin does not show the same seasonality as our
Premium Gross Margin and has tended to increase quarterly during the
calendar year.

Spotify for Artists

We launched several critical tools on our Spotify for Artists platform
this quarter with the aim of making our two-sided marketplace more
robust. On September 20, we announced the beta test of our direct upload
feature which allows DIY and independent artists to upload their content
straight to Spotify. Direct upload has been one of the most consistently
requested features from artists over the years. These new tools provide
an easy way for creators to get their content onto our platform, reach
new and existing fans, and most importantly, get compensated for their
work. These tools are in limited beta in the US, and we hope to expand
the program further in the near future.

In addition to direct upload, we also launched a playlist submission
feature in July, which enables artists, labels, and their teams to
submit unreleased music directly to our editorial team for consideration
for inclusion on our O&O playlists. Since then, more than 67,000 artists
and labels have submitted content, and over 10,000 artists have been
added to our playlists for the first time. Following the results of this
beta test, we decided to open this feature to all creators in October.
More than 30% of consumption on the platform continues to happen through
these types of playlists. Today, approximately 250,000 creators and
their teams use Spotify for Artists on a monthly basis.

Separately, we continue to invest in podcasts and other forms of spoken
word audio entertainment. We signed an exclusive deal with Joe Budden to
bring his self-titled podcast to Spotify on September 12. Since that
time, The Joe Budden Podcast has become the #1 podcast on the platform
and engagement has been increasing. Our overall market share of podcasts
globally continues to grow, and we intend to continue to invest in
exclusive and original content on this front through Q4 and beyond.

Operating Expenses / Income (Loss)

Operating expenses totaled €348 million in Q3, resulting in a total
Operating Loss of €6 million, better than the low end of our guidance
range. Operating Margin of (0.5%) is an improvement of more than 650 bps
Y/Y.

Operating margin improvement in Q3 was largely due to shortfalls in
hiring, which have continued into Q4. However, we intend to accelerate
the pace of investment in R&D and Content in 2019 in order to capitalize
on near-term and long-term growth opportunities. If we are successful in
accelerating our investments in R&D and Content, these investments are
likely to reduce our operating margins for the foreseeable future. We
expect to provide guidance for 2019 as part of the Q4 2018 earnings
report.

As of September 30, we had 4,040 full-time employees and contractors
globally. Research & Development continues to make up the greatest share
of hiring, accounting for more than 40% of headcount additions.

IFRS 16

Starting January 1, 2019, we will be adopting a new leasing standard as
dictated by IFRS 16. In essence, certain leases which were held on the
books as operating leases will be treated as capital leases going
forward. Certain leases will be reclassified as assets and liabilities
on the balance sheet which will yield increased depreciation and
interest expense, offset by a reduction in rental expense. This will
have a positive, albeit minimal, impact on Gross Margin, and a much more
significant impact on Operating Margin. We will provide additional
information on the impact of these changes when they go into effect next
year.

Free Cash Flow

We generated €80 million in Net cash flows from operating activities and
€33 million in Free Cash Flow in Q3. We maintain positive working
capital dynamics, and our goal is to sustain and grow Free Cash Flow
excluding the impact of capital expenditures associated with the
build-out of new and existing offices in New York, London, Los Angeles,
Stockholm, and Boston, among others. We paid out approximately €50
million associated with our office builds during the third quarter. We
continue to anticipate these projects to cost more than €275 million and
be substantially complete by the end of 2019.

At the end of the quarter we held €1.8 billion in cash and cash
equivalents, restricted cash, and short term investments.

OUTLOOK

These forward-looking statements reflect Spotify’s expectations as of
November 1, 2018 and are subject to substantial uncertainty. For the
fourth quarter we are expecting:

GOOGLE HOME

Yesterday we announced a partnership with Google where Spotify will
offer Google Home Mini speakers to Family plan master account holders in
the US during the holiday season. We anticipate that this partnership
will have an adverse impact of approximately 50 bps on our Gross Margin
profile in Q4. This impact is baked into our guidance range above and
accounts for all of the reduction in Gross Margin guidance provided
previously.

TME INVESTMENT

As previously disclosed, we own shares of Tencent Music Entertainment
Group (“TME”) which are classified on our balance sheet as a long term
investment. During Q3, TME filed a Registration Statement publicly with
the SEC, which contained objective evidence that required a mark to
market adjustment of the fair value of our TME investment. The
revaluation resulted in the recognition of a portion of the value of our
net operating loss carryforwards for tax purposes, which resulted in Net
Income for the first time in our operating history.

While TME has filed to go public in the US, their listing has not yet
occurred. The value of our investment is held at a price per share of
$6.52, which is the most recently estimated fair value of ordinary
shares disclosed in TME’s publicly filed Registration Statement. Any
deviation from this price at quarter end would trigger additional fair
market value adjustments.

EARNINGS QUESTION & ANSWER SESSION

The Company will host a live question and answer session starting at 8
a.m. ET today on investors.spotify.com. Daniel Ek, our Co-Founder and
CEO, and Barry McCarthy, our Chief Financial Officer, will be on hand to
answer questions submitted to ir@spotify.com
and via the live chat window available through the webcast. Participants
also may join using the listen-only conference line:

This shareholder letter includes references to the non-IFRS financial
measures of EBITDA and Free Cash Flow. Management believes that EBITDA
and Free Cash Flow are important metrics because they present measures
that approximate the amount of cash generated that is available to repay
debt obligations, make investments, and for certain other activities
that excludes certain infrequently occurring and/or non-cash items.
However, these measures should be considered in addition to, not as a
substitute for or superior to, net income, operating income, or other
financial measures prepared in accordance with IFRS. This shareholder
letter also includes references to the non-IFRS financial measures of
Revenue excluding foreign exchange effect, Premium revenue excluding
foreign exchange effect and Ad-Supported revenue excluding foreign
exchange effect. Management believes that Revenue excluding foreign
exchange effect, Premium revenue excluding foreign exchange effect and
Ad-Supported revenue excluding foreign exchange effect are important
metrics because they present measures that facilitate comparison to our
historical performance. Revenue excluding foreign exchange effect,
Premium revenue excluding foreign exchange effect and Ad-Supported
revenue excluding foreign exchange effect should be considered in
addition to, not as a substitute for or superior to, Revenue, Premium
revenue, Ad-Supported revenue or other financial measures prepared in
accordance with IFRS.

Forward Looking Statements

We would like to caution you that this letter to shareholders contains
“forward-looking statements” as defined in Section 27A of the United
States Securities Act of 1933, as amended, and Section 21E of the United
States Securities Exchange Act of 1934, as amended. We intend such
forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and include this statement for purposes of
complying with the safe harbor provisions. Such forward-looking
statements involve significant risks, uncertainties and assumptions that
could cause actual results to differ materially from our historical
experience and our present expectations or projections, including but
not limited to the following known material factors: our ability to
attract prospective customers and to retain existing customers; our
dependence upon third-party licenses for sound recordings and musical
compositions; our ability to comply with the many complex license
agreements to which we are a party; our ability to generate sufficient
revenue to be profitable or to generate positive cash flow on a
sustained basis; our lack of control over the providers of our content
and their effect on our access to music and other content; our ability
to accurately estimate the amounts payable under our license agreements;
the limitations on our operating flexibility due to the minimum
guarantees required under certain of our license agreements; our ability
to obtain accurate and comprehensive information about music
compositions in order to obtain necessary licenses or perform
obligations under our existing license agreements; potential breaches of
our security systems; risk associated with unauthorized access of our
software and services and manipulation of stream counts and customer
accounts; assertions by third parties of infringement or other
violations by us of their intellectual property rights; risks related to
our status as a foreign private issuer; dilution resulting from
additional share issuances; the concentration of voting power among our
founders who have and will continue to have substantial control over our
business; tax-related risks; unanticipated changes relating to
competitive factors in our industry; ability to hire and retain key
personnel; changes in legislation or governmental regulations affecting
us; international, national or local economic, social or political
conditions; conditions in the credit markets; risks associated with
accounting estimates, currency fluctuations and foreign exchange
controls; and such other risks as set forth in our filings with the
United States Securities and Exchange Commission.

We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no
obligation to publicly update or revise any of our forward-looking
statements after the date they are made, whether as a result of new
information, future events or otherwise, except to the extent required
by law.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.